What is meant by the Bretton Woods Agreement?

what is meant by bretton woods agreement class 10

The summit was also looking for policies and regulations that would maximize the potential benefits and profits that could be derived from the global trading system. What resulted from the conference were the Bretton Woods Agreement and the Bretton Woods System. In 1945, Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year Germany was divided into four occupation zones (Soviet, American, British, and French).

Treasury in 1942–44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall, White’s scheme tended to favor incentives designed to create price stability within the world’s economies, while Keynes wanted a system that encouraged economic growth. The “collective agreement was an enormous international undertaking” that took two years prior to the conference to prepare for.

What was the name of the agreement that laid the foundation for the creation of the IMF and World Bank Group?

Meeting in December 1971 at the Smithsonian Institution in Washington, D.C., the Group of Ten signed the Smithsonian Agreement. The U.S. pledged to peg the dollar at $38/ounce with 2.25% trading bands, and other countries agreed to appreciate their currencies versus the dollar. The group also planned to balance the world financial system using special drawing rights alone.

what is meant by bretton woods agreement class 10

With total reserves exceeding those of the U.S., higher levels of growth and trade, and per capita income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States. After the end of what is meant by bretton woods agreement class 10 World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the gold base increased by only a few percentage points.

Describe any three features of Bretton Woods Agreement.

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Tandemly, the World Bank helps to promote these efforts through its loans and grants to governments. Members were required to establish a parity of their national currencies in terms of the reserve currency (a “peg”) and to maintain exchange rates within plus or minus 1% of parity (a “band”) by intervening in their foreign exchange markets (that is, buying or selling foreign money). The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade. In response to the monetary disorder post WWI, the Bretton Woods Agreement was signed by 44 countries in 1944.

History and Functionality of the Bretton Woods Agreement

If the demands on Germany were unrealistic, then it was unrealistic for France to pay back Britain, and for Britain to pay back the US.[7] Thus, many “assets” on bank balance sheets internationally were actually unrecoverable loans, which culminated in the 1931 banking crisis. In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk when trading with other countries. The  Bretton Woods System is a set of unified rules and policies that provided the framework necessary to create fixed international currency exchange rates.

  • The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates.
  • A key reason for Bretton Woods’ collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system.
  • Keynes’ hope was to establish a powerful global central bank to be called the Clearing Union and issue a new international reserve currency called the bancor.
  • In the aftermath of the Great Depression, public management of the economy had emerged as a primary activity of governments in the developed states.
  • Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock.

Since 1964 various banks had formed international syndicates, and by 1971 over three-quarters of the world’s largest banks had become shareholders in such syndicates. Multinational banks can and do make large international transfers of capital not only for investment purposes but also for hedging and speculating against exchange rate fluctuations. The Bretton Woods arrangements were largely adhered to and ratified by the participating governments.

What is meant by the Bretton Woods Agreement explain Class 10?

Aid to Europe and Japan was designed to rebuild productivity and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U.S. exports, and providing locations for U.S. capital expansion. As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significance of the economic aspect of international relations seemed to recede. Member countries could only change their par value by more than 10% with IMF approval, which was contingent on IMF determination that its balance of payments was in a “fundamental disequilibrium”. The formal definition of fundamental disequilibrium was never determined, leading to uncertainty of approvals and attempts to repeatedly devalue by less than 10% instead.[30] Any country that changed without approval or after being denied approval was denied access to the IMF. (iii)The International Bank for Reconstruction and Development (popularly known as the World Bank) was set up to finance postwar reconstruction.

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